PROJECT REPORT ON FINANCIAL

BUSINESS MODELLING

AIM: - To develop an econometric model for spot price of an asset, using future price of
same commodity.
OBJECTIVE:- To find optimal hedge ratio.
To check for CLRM assumptions.
Time series analysis of spot and future prices data.
COMMODITY: COPPER
Period of data: 5 years (July 2008- July 2013)
Source: Multi Commodity Exchange (www.mcxindia.com)
Total data set : 1799
For Spot Data:-

For Future Data:-











ANALYSIS
Scatter diagram

Inference :- The intercept is 0.0002354 and Slope is 0.032. As the slope is very small, the
correlation is very less.
Inference :



FUTURE_X_ SPOT_Y_
Mean 0.000261 0.000244
Median 0.000531 0.000000
Maximum 0.099706 0.100096
Minimum -0.106688 -0.115489
Std. Dev. 0.016729 0.019595
Skewness -0.254114 -0.151412
Kurtosis 7.170110 6.562226

Jarque-Bera 1322.873 958.0541
Probability 0.000000 0.000000

Sum 0.468900 0.438549
Sum Sq. Dev. 0.503193 0.690340

Observations 1799 1799






-.12
-.08
-.04
.00
.04
.08
.12
-.12 -.08 -.04 .00 .04 .08 .12
future(x)
s
p
o
t
(
y
)
SPOT_Y_=0.0002354+0.032*FUTURE_X_




Regression
Dependent Variable: SPOT_Y_
Method: Least Squares
Date: 11/24/13 Time: 18:18
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments


Variable Coefficient Std. Error t-Statistic Prob.


C 0.000235 0.000462 0.509606 0.6104
FUTURE_X_ 0.032001 0.027620 1.158618 0.2468


R-squared 0.000746 Mean dependent var 0.000244
Adjusted R-squared 0.000190 S.D. dependent var 0.019595
S.E. of regression 0.019593 Akaike info criterion -5.026203
Sum squared resid 0.689825 Schwarz criterion -5.020095
Log likelihood 4523.070 Hannan-Quinn criter. -5.023948
F-statistic 1.342395 Durbin-Watson stat 2.214350
Prob(F-statistic) 0.246766


Analysis Optimal hedge ratio is 0.032001 and effectiveness is 0.074%.
As the value of R-square is very less, thus there is very less correlation between the
dependent and independent variable.
DW Stats is 2.214, it means that there is no autocorrelation.

Heteroskedasticity Test: White


F-statistic 40.34988 Prob. F(2,1796) 0.0000
Obs*R-squared 77.35861 Prob. Chi-Square(2) 0.0000
Scaled explained SS 211.5330 Prob. Chi-Square(2) 0.0000



Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 11/24/13 Time: 18:21
Sample: 3 1801
Included observations: 1799


Variable Coefficient Std. Error t-Statistic Prob.


C 0.000309 2.24E-05 13.82070 0.0000
FUTURE_X_ -0.000706 0.001244 -0.567801 0.5702
FUTURE_X_^2 0.266192 0.029983 8.878048 0.0000


R-squared 0.043001 Mean dependent var 0.000383
Adjusted R-squared 0.041935 S.D. dependent var 0.000898
S.E. of regression 0.000879 Akaike info criterion -11.23405
Sum squared resid 0.001387 Schwarz criterion -11.22488
Log likelihood 10108.03 Hannan-Quinn criter. -11.23067
F-statistic 40.34988 Durbin-Watson stat 2.137618
Prob(F-statistic) 0.000000


Analysis :- Null Hypothesis : There is no Heteroscedasticity.
Rejected the null hypothesis as the probe value is less than 0.05.
Thus, there is heteroscedasticity.

Coorelogram Test : LEVEL(lnspot)
Date: 11/24/13 Time: 19:03
Sample: 1 1801
Included observations: 1799


Autocorrelation Partial Correlation AC PAC Q-Stat Prob


*| | *| | 1 -0.083 -0.083 12.507 0.000
| | | | 2 -0.010 -0.017 12.671 0.002
| | | | 3 0.026 0.024 13.898 0.003
| | | | 4 -0.030 -0.026 15.475 0.004
| | | | 5 0.045 0.041 19.075 0.002
| | | | 6 -0.047 -0.042 23.117 0.001
| | | | 7 -0.007 -0.012 23.211 0.002
| | | | 8 0.003 -0.003 23.222 0.003
| | | | 9 0.014 0.018 23.581 0.005
| | | | 10 0.025 0.024 24.719 0.006
| | | | 11 0.047 0.055 28.739 0.002
| | | | 12 0.006 0.013 28.805 0.004
| | | | 13 0.036 0.039 31.209 0.003
| | | | 14 -0.043 -0.040 34.620 0.002
| | | | 15 -0.033 -0.038 36.577 0.001
| | | | 16 0.061 0.052 43.317 0.000
| | | | 17 -0.011 0.005 43.553 0.000
| | | | 18 0.000 -0.001 43.553 0.001
| | | | 19 -0.025 -0.024 44.701 0.001
| | | | 20 0.027 0.023 45.992 0.001
| | | | 21 0.053 0.046 51.106 0.000
| | | | 22 -0.015 -0.005 51.518 0.000
| | | | 23 0.037 0.035 54.064 0.000
| | | | 24 0.015 0.022 54.500 0.000
| | | | 25 -0.002 0.004 54.505 0.001
| | | | 26 0.005 0.002 54.559 0.001
| | | | 27 -0.049 -0.045 58.861 0.000
| | | | 28 0.012 0.003 59.115 0.001
| | | | 29 0.036 0.033 61.483 0.000
| | | | 30 -0.035 -0.022 63.690 0.000
| | | | 31 0.025 0.019 64.809 0.000
| | | | 32 0.050 0.048 69.316 0.000
| | | | 33 0.022 0.023 70.204 0.000
| | | | 34 -0.017 -0.025 70.745 0.000
| | | | 35 -0.028 -0.022 72.178 0.000
| | | | 36 -0.039 -0.050 75.044 0.000


Analysis : Null Hypothesis- There is no autocorrelation.
Rejected null hypothesis.
Prob value is less than 0.05, thus there is a problem of autocorrelation.









Correlogram:-first difference(lnspot)

Date: 11/24/13 Time: 19:13
Sample: 1 1801
Included observations: 1798


Autocorrelation Partial Correlation AC PAC Q-Stat Prob


****| | ****| | 1 -0.534 -0.534 513.70 0.000
| | ***| | 2 0.018 -0.374 514.26 0.000
| | **| | 3 0.042 -0.236 517.46 0.000
| | **| | 4 -0.060 -0.244 523.94 0.000
|* | *| | 5 0.077 -0.128 534.55 0.000
| | *| | 6 -0.061 -0.140 541.26 0.000
| | *| | 7 0.014 -0.131 541.61 0.000
| | *| | 8 -0.001 -0.135 541.61 0.000
| | *| | 9 0.000 -0.125 541.61 0.000
| | *| | 10 -0.005 -0.139 541.66 0.000
| | *| | 11 0.029 -0.086 543.20 0.000
| | *| | 12 -0.033 -0.103 545.17 0.000
| | | | 13 0.051 -0.020 549.85 0.000
| | | | 14 -0.042 -0.024 553.00 0.000
| | *| | 15 -0.038 -0.109 555.67 0.000
|* | | | 16 0.077 -0.057 566.34 0.000
| | | | 17 -0.039 -0.048 569.06 0.000
| | | | 18 0.017 -0.023 569.58 0.000
| | *| | 19 -0.036 -0.068 571.87 0.000
| | *| | 20 0.012 -0.086 572.12 0.000
| | | | 21 0.044 -0.032 575.57 0.000
| | *| | 22 -0.056 -0.070 581.20 0.000
| | | | 23 0.034 -0.054 583.35 0.000
| | | | 24 -0.002 -0.034 583.36 0.000
| | | | 25 -0.011 -0.031 583.59 0.000
| | | | 26 0.028 0.015 585.04 0.000
| | | | 27 -0.053 -0.033 590.12 0.000
| | | | 28 0.017 -0.061 590.63 0.000
| | | | 29 0.044 -0.005 594.14 0.000
| | | | 30 -0.060 -0.045 600.74 0.000
| | *| | 31 0.016 -0.072 601.20 0.000
| | | | 32 0.024 -0.045 602.28 0.000
| | | | 33 0.005 0.004 602.33 0.000
| | | | 34 -0.013 0.000 602.65 0.000
| | | | 35 0.000 0.026 602.65 0.000
| | *| | 36 -0.052 -0.077 607.69 0.000



Analysis : Null Hypothesis- There is no autocorrelation.
Rejected null hypothesis.
Prob value is less than 0.05, thus there is a problem of autocorrelation.









Correlogram: second diff. (lnspot)

Date: 11/24/13 Time: 19:13
Sample: 1 1801
Included observations: 1797


Autocorrelation Partial Correlation AC PAC Q-Stat Prob


*****| | *****| | 1 -0.678 -0.678 828.23 0.000
|* | ****| | 2 0.171 -0.536 880.77 0.000
| | ***| | 3 0.042 -0.373 883.94 0.000
*| | ***| | 4 -0.078 -0.367 895.02 0.000
|* | **| | 5 0.090 -0.253 909.54 0.000
*| | *| | 6 -0.069 -0.200 918.16 0.000
| | *| | 7 0.028 -0.155 919.58 0.000
| | *| | 8 -0.005 -0.135 919.62 0.000
| | *| | 9 0.003 -0.099 919.63 0.000
| | *| | 10 -0.013 -0.122 919.96 0.000
| | *| | 11 0.031 -0.069 921.75 0.000
| | *| | 12 -0.047 -0.102 925.83 0.000
| | | | 13 0.057 -0.040 931.72 0.000
| | | | 14 -0.030 0.051 933.36 0.000
| | | | 15 -0.037 -0.011 935.90 0.000
|* | | | 16 0.075 -0.006 946.23 0.000
| | | | 17 -0.056 -0.011 951.85 0.000
| | | | 18 0.035 0.038 954.06 0.000
| | | | 19 -0.032 0.034 955.96 0.000
| | | | 20 0.005 -0.023 956.00 0.000
| | | | 21 0.042 0.015 959.26 0.000
| | | | 22 -0.060 -0.007 965.90 0.000
| | | | 23 0.041 -0.017 968.89 0.000
| | | | 24 -0.010 -0.007 969.06 0.000
| | | | 25 -0.016 -0.031 969.50 0.000
| | | | 26 0.040 0.029 972.48 0.000
| | | | 27 -0.050 0.035 977.02 0.000
| | | | 28 0.014 -0.023 977.40 0.000
| | | | 29 0.041 0.021 980.52 0.000
| | | | 30 -0.058 0.025 986.58 0.000
| | | | 31 0.022 -0.014 987.49 0.000
| | | | 32 0.008 -0.041 987.61 0.000
| | | | 33 0.000 -0.008 987.61 0.000
| | | | 34 -0.009 -0.006 987.77 0.000
| | |* | 35 0.020 0.080 988.50 0.000
| | | | 36 -0.056 0.017 994.16 0.000




Analysis : Null Hypothesis- There is no autocorrelation.
Rejected null hypothesis.
Prob value is less than 0.05, thus there is a problem of autocorrelation.


Level unitroot
Null Hypothesis: LNSPOT has a unit root
Exogenous: Constant
Lag Length: 1 (Automatic based on SIC, MAXLAG=24)


t-Statistic Prob.*


Augmented Dickey-Fuller test statistic -1.359802 0.6033
Test critical values: 1% level -3.433783
5% level -2.862943
10% level -2.567564


*MacKinnon (1996) one-sided p-values.


Augmented Dickey-Fuller Test Equation
Dependent Variable: D(LNSPOT)
Method: Least Squares
Date: 11/24/13 Time: 19:30
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments


Variable Coefficient Std. Error t-Statistic Prob.


LNSPOT(-1) -0.002453 0.001804 -1.359802 0.1741
D(LNSPOT(-1)) -0.081989 0.023522 -3.485581 0.0005
C 0.014473 0.010460 1.383731 0.1666


R-squared 0.007962 Mean dependent var 0.000244
Adjusted R-squared 0.006857 S.D. dependent var 0.019595
S.E. of regression 0.019527 Akaike info criterion -5.032339
Sum squared resid 0.684843 Schwarz criterion -5.023176
Log likelihood 4529.589 Hannan-Quinn criter. -5.028956
F-statistic 7.207360 Durbin-Watson stat 2.002514
Prob(F-statistic) 0.000763


Analysis :- The prob. Value is 0.6033, so we will accept the null hypothesis ,i.e. ther is unit root
problem. Data is non stationary.


First difference unit root

Null Hypothesis: D(LNSPOT) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=24)


t-Statistic Prob.*


Augmented Dickey-Fuller test statistic -46.08289 0.0001
Test critical values: 1% level -3.433783
5% level -2.862943
10% level -2.567564


*MacKinnon (1996) one-sided p-values.


Augmented Dickey-Fuller Test Equation
Dependent Variable: D(LNSPOT,2)
Method: Least Squares
Date: 11/24/13 Time: 19:32
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments


Variable Coefficient Std. Error t-Statistic Prob.


D(LNSPOT(-1)) -1.083311 0.023508 -46.08289 0.0000
C 0.000264 0.000461 0.573425 0.5664


R-squared 0.541656 Mean dependent var 0.000000
Adjusted R-squared 0.541401 S.D. dependent var 0.028842
S.E. of regression 0.019532 Akaike info criterion -5.032422
Sum squared resid 0.685549 Schwarz criterion -5.026313
Log likelihood 4528.663 Hannan-Quinn criter. -5.030167
F-statistic 2123.633 Durbin-Watson stat 2.002758
Prob(F-statistic) 0.000000


Analysis :- The prob. Value is 0.00001, so we will reject the null hypothesis ,i.e. ther is not unit
root problem. Data is stationary.

Level unitroot
Null Hypothesis: LNFUTURE has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=24)


t-Statistic Prob.*


Augmented Dickey-Fuller test statistic -1.215859 0.6697
Test critical values: 1% level -3.433781
5% level -2.862942
10% level -2.567563


*MacKinnon (1996) one-sided p-values.


Augmented Dickey-Fuller Test Equation
Dependent Variable: D(LNFUTURE)
Method: Least Squares
Date: 11/24/13 Time: 19:34
Sample (adjusted): 2 1801
Included observations: 1800 after adjustments


Variable Coefficient Std. Error t-Statistic Prob.


LNFUTURE(-1) -0.001898 0.001561 -1.215859 0.2242
C 0.011251 0.009061 1.241747 0.2145


R-squared 0.000822 Mean dependent var 0.000245
Adjusted R-squared 0.000266 S.D. dependent var 0.016738
S.E. of regression 0.016735 Akaike info criterion -5.341475
Sum squared resid 0.503570 Schwarz criterion -5.335369
Log likelihood 4809.327 Hannan-Quinn criter. -5.339221
F-statistic 1.478314 Durbin-Watson stat 2.014125
Prob(F-statistic) 0.224198



Analysis :- The prob. Value is 0.6697, so we will accept the null hypothesis ,i.e. ther is unit root
problem. Data is non stationary.

First difference unit root
Null Hypothesis: D(LNFUTURE) has a unit root
Exogenous: Constant
Lag Length: 0 (Automatic based on SIC, MAXLAG=24)


t-Statistic Prob.*


Augmented Dickey-Fuller test statistic -42.80512 0.0000
Test critical values: 1% level -3.433783
5% level -2.862943
10% level -2.567564


*MacKinnon (1996) one-sided p-values.


Augmented Dickey-Fuller Test Equation
Dependent Variable: D(LNFUTURE,2)
Method: Least Squares
Date: 11/24/13 Time: 19:35
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments


Variable Coefficient Std. Error t-Statistic Prob.


D(LNFUTURE(-1)) -1.009028 0.023573 -42.80512 0.0000
C 0.000263 0.000395 0.666092 0.5054


R-squared 0.504860 Mean dependent var 2.10E-05
Adjusted R-squared 0.504585 S.D. dependent var 0.023773
S.E. of regression 0.016733 Akaike info criterion -5.341749
Sum squared resid 0.503152 Schwarz criterion -5.335640
Log likelihood 4806.903 Hannan-Quinn criter. -5.339494
F-statistic 1832.278 Durbin-Watson stat 2.000640
Prob(F-statistic) 0.000000


Analysis :- The prob. Value is 0.0000, so we will reject the null hypothesis ,i.e. there is not unit
root problem. Data is stationary.













AR(1)
Dependent Variable: D_LNSPOT
Method: Least Squares
Date: 11/24/13 Time: 19:39
Sample (adjusted): 3 1801
Included observations: 1799 after adjustments
Convergence achieved after 3 iterations


Variable Coefficient Std. Error t-Statistic Prob.


C 0.000244 0.000425 0.573470 0.5664
AR(1) -0.083311 0.023508 -3.543970 0.0004


R-squared 0.006941 Mean dependent var 0.000244
Adjusted R-squared 0.006388 S.D. dependent var 0.019595
S.E. of regression 0.019532 Akaike info criterion -5.032422
Sum squared resid 0.685549 Schwarz criterion -5.026313
Log likelihood 4528.663 Hannan-Quinn criter. -5.030167
F-statistic 12.55973 Durbin-Watson stat 2.002758
Prob(F-statistic) 0.000404


Inverted AR Roots -.08






































Date: 11/24/13 Time: 19:41
Sample: 3 1801
Included observations: 1799
Q-statistic
probabilities adjusted
for 1 ARMA term(s)


Autocorrelation Partial Correlation AC PAC Q-Stat Prob


| | | | 1 -0.001 -0.001 0.0034
| | | | 2 -0.014 -0.014 0.3804 0.537
| | | | 3 0.023 0.023 1.3484 0.510
| | | | 4 -0.024 -0.024 2.3915 0.495
| | | | 5 0.039 0.040 5.1135 0.276
| | | | 6 -0.045 -0.046 8.7427 0.120
| | | | 7 -0.011 -0.009 8.9640 0.176
| | | | 8 0.003 -0.001 8.9818 0.254
| | | | 9 0.017 0.020 9.4797 0.303
| | | | 10 0.031 0.027 11.170 0.264
| | | | 11 0.050 0.054 15.767 0.106
| | | | 12 0.013 0.012 16.080 0.138
| | | | 13 0.034 0.034 18.150 0.111
| | | | 14 -0.044 -0.046 21.609 0.062
| | | | 15 -0.032 -0.030 23.448 0.053
| | | | 16 0.058 0.055 29.570 0.014
| | | | 17 -0.006 0.001 29.645 0.020
| | | | 18 -0.003 -0.003 29.661 0.029
| | | | 19 -0.023 -0.022 30.643 0.032
| | | | 20 0.029 0.029 32.210 0.030
| | | | 21 0.055 0.043 37.660 0.010
| | | | 22 -0.008 -0.006 37.767 0.014
| | | | 23 0.038 0.037 40.390 0.010
| | | | 24 0.019 0.019 41.025 0.012
| | | | 25 0.000 0.003 41.025 0.017
| | | | 26 0.001 -0.002 41.028 0.023
| | | | 27 -0.048 -0.044 45.194 0.011
| | | | 28 0.011 0.010 45.411 0.015
| | | | 29 0.035 0.030 47.596 0.012
| | | | 30 -0.030 -0.023 49.256 0.011
| | | | 31 0.026 0.024 50.524 0.011
| | | | 32 0.054 0.048 55.909 0.004
| | | | 33 0.025 0.017 57.058 0.004
| | | | 34 -0.018 -0.028 57.646 0.005
| | | | 35 -0.033 -0.024 59.656 0.004
| | | | 36 -0.037 -0.043 62.191 0.003